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Locking in the rate or staying flexible? Mortgage refinancing around an interest rate shock

Author

Listed:
  • Philippe Bracke

    (Bank of England)

  • João F. Cocco

    (London Business School)

  • Elena Markoska

    (Bank of England)

  • Purnoor Tak

    (London Business School)

Abstract

This paper examines UK mortgage refinancing around the 23 September 2022 mini-budget interest rate shock, exploiting predetermined expiry dates of discounted two and five year fixed-rate mortgages. We find: (a) a shift toward two-year fixes, even though they priced above five-year mortgages; and (b) deleveraging, with a 200 basis points rate rise linked to a 2–3 percentage points drop in average loan to value ratios. Although the adjustable-rate mortgage share increased, most borrowers still chose the pricier two-year fix, consistent with seeking rate risk protection plus near-term flexibility for equity extraction if rates fall, an interpretation supported by evidence that near-term equity extraction is likelier under two than five-year loans.

Suggested Citation

  • Philippe Bracke & João F. Cocco & Elena Markoska & Purnoor Tak, 2026. "Locking in the rate or staying flexible? Mortgage refinancing around an interest rate shock," Bank of England Staff Working Paper series 1203, Bank of England.
    • Handle: RePEc:boe:boeewp:023579
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    File URL: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2026/locking-in-the-rate-or-staying-flexible-mortgage-refinancing-around-an-interest-rate-shock.pdf
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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G5 - Financial Economics - - Household Finance
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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